5 Vice Stocks That’ll Test Your Conscience

Sometimes sin is sweetly profitable ... but not always

Altria

No list of prominent vice stocks would be complete without mention of cigarettes. Big Tobacco is a true pariah industry and the quintessential vice investment. Unless prohibited for religious reasons — as is common with Islamic investment funds — many socially responsible investors will give alcohol a free pass. Not so with tobacco.

This is precisely why Big Tobacco has been such a profitable investment over the decades. Because they have limited potential for growth and are largely forbidden to advertise, tobacco companies have huge piles of cash to distribute as dividends. And because many investors shun the sector, the cheap valuations push the yield higher. With dividends reinvested and compounded, Altria (MO) is the most profitable company of the past half-century, as Jeremy Siegel laid out in The Future for Investors.

Unfortunately, investors seem to have caught on, and much of what made Altria such a fantastic investment in years past no longer holds true.

At current prices, Altria yields 4.9% in dividends, which still makes it one of the biggest payers among large-cap American stocks. But this is significantly cheaper than its five-year average of 6.5%, and it no longer trades at a discount to the broader market. In fact, most Big Tobacco stocks trade at a slight premium to the market.

Tobacco stocks were fantastic investments for virtually the entire investing lifetime of anyone trading today. But they were great investments precisely because they weren’t popular … and today, they are.

As compelling as the vice story is, Big Tobacco is best avoided at this time.